Long-Run Revenue Effects of
Changes in
Cost Recovery Allowances
Prepared for the
CRANE Coalition
April 2015
i
Long-Run Revenue Effects of Changes in
Cost Recovery Allowances
Contents
Executive Summary......................................................................................1
I. Introduction .............................................................................................2
II. Revenue Analysis and Cost Recovery ..................................................3
A. Key Concepts of Revenue Analyses .................................................3
B. Revenue Estimates that Eliminate Accelerated Cost Recovery ...5
C. Long-Term Revenue Effects .............................................................7
III.
Conclusions .......................................................................................12
Appendix A – Recovery Periods................................................................13
Appendix B – Supporting Data .................................................................14
References....................................................................................................16
i
LIST OF TABLES
Table 1
Comparison of the Annual Cost Recovery under MACRS and ADS ..............6
Table 2
Estimated Revenue Effects of Provisions to Eliminate Accelerated Cost
Recovery Provisions, Fiscal Years 2014 – 2023 ..............................................8
Table A-1
Recovery Period under MACRS and ADS ....................................................13
Table B-1
Estimated Annual Differences in Depreciation Deductions...........................14
LIST OF GRAPHS
Graph 1
Compare MACRS and ADS Depreciation Methods ........................................6
Graph 2
Estimated Revenue Effects during the Second Ten-Year Budget Period, Repeal
of MACRS for Stand-Alone and Tax Reform Proposals ...............................10
Graph 3
Estimated Net Revenue Shortfall during the Second
Ten-Year Budget Period .................................................................................11
ii
Long-Run Revenue Effects of Changes in
Cost Recovery Allowances
Executive Summary
Recent discussions promoting tax reform often include proposals to curtail
accelerated depreciation as the primary means of offsetting the cost of other tax
cuts. The curtailment of accelerated depreciation can raise revenue for tax
reform in the short term. However, such revenue increases fall off over the
long term because of the nature of the depreciation allowance. Reducing
depreciation deductions is largely a front-loaded revenue increase.
Revenue estimates quantify the effects of proposed changes in tax policy. Thus,
when Congress considers a change in the law affecting federal receipts, the staff
of the Joint Committee on Taxation (JCT) prepares a revenue estimate. These
revenue estimates rely on a predetermined set of budget scoring rules and
estimating conventions which can distort the long term budget consequences to
the federal government of cost recovery proposals. Given the predetermined
framework of the fixed budget baseline, the 10-year budget window, and cashflow accounting, revenue estimates of many proposals – including accelerated
cost recovery – tend to distort the true revenue raising potential of the provision.
The problem with relying on cuts in accelerated depreciation for tax reform is
that changes in the depreciation rules may accelerate or delay a deduction for
tax purposes, but they do not alter the total amount deducted. Therefore,
modifications to the depreciation rules may decrease deductions during the
budget window, and thereby increase revenues during that period. However,
those deductions will be available, and taken, beyond the budget window.
These deferred deductions simply reduce revenues in future budget periods.
Therefore, future revenues collected by the federal government will fall short of
expectations, due to these unrecognized losses. In other words, the ten-year
budget window fails to depict accurately the consequences of using repeal of
accelerated depreciation as a long term revenue offset – deferring the budget
losses for a future Congress. In addition, accelerated depreciation plays an
important role in stimulating investment and economic growth. Loss of that
provision would alter the investment decisions of many capital-intensive
businesses.
Offsetting the cost of tax reform with a temporary timing change of receipts is
imprudent tax policy. Because of the front-loaded nature of the depreciation
allowance, a tax reform measure that relies on cuts in accelerated depreciation
as a long-term revenue offset would have the effect of increasing future budget
deficits. Those deficits would force the government to consider budgetary
changes in the future – including the possible restoration of higher tax rates.
Capital intensive businesses that invest in domestic plant and equipment could
thus face the permanent loss of accelerated depreciation without the benefit of
reduced tax rates.
1
Long-Run Revenue Effects of Changes in
Cost Recovery Allowances
I.
Introduction
Recent discussions promoting tax reform often include proposals to curtail
accelerated depreciation as the primary means of offsetting the cost of other tax
cuts.1 The curtailment of accelerated depreciation can raise revenue for tax
reform in the short term. However, such revenue increases fall off over the long
term because of the nature of the depreciation allowance. Reliance on cuts in
accelerated depreciation to keep tax reform budget neutral over the long term is
seriously misplaced.
The problem with relying on cuts in accelerated depreciation for tax reform is
that changes in the depreciation rules may accelerate or delay a deduction for
tax purposes, but they do not alter the total amount deducted. Therefore,
modifications to the depreciation rules may decrease deductions during the
budget window, and thereby increase revenues, but those deductions will be
available beyond the budget window.2 Cuts in depreciation deductions are
largely a front-loaded revenue increase.
Because of the nature of the depreciation allowance, a tax reform measure that
relies on cuts in accelerated depreciation as a long-term revenue offset would
have the effect of increasing future budget deficits. Those deficits would force
the government to consider budgetary changes in the future – including the
possible restoration of higher tax rates. Capital intensive businesses that invest
in domestic plant and equipment could thus face the permanent loss of
accelerated depreciation without the benefit of reduced tax rates.
The following sections address these issues in greater detail, taking a much
longer view of the budgetary impacts of changing the tax treatment of
investment and examining how the long-term pattern of revenues from altering
the depreciation schedule is likely to affect aggregate tax revenues over the next
twenty years.
For example, refer to the “Bipartisan Tax Fairness and Simplification Act of 2011,” offered by Senators Ron
Wyden and Dan Coats and the “Tax Reform Act of 2014,” offered by then House Ways and Means Committee
Chairman, Dave Camp.
2
These deferred deductions simply reduce revenues in future budget periods.
1
2
II.
Revenue Analysis and Cost Recovery
Revenue estimates quantify the effects of proposed changes in tax policy. Thus,
when Congress considers a change in the law affecting federal receipts, the staff
of the Joint Committee on Taxation (JCT) prepares a revenue estimate. These
revenue estimates rely on a predetermined set of budget scoring rules,
established in the Congressional Budget and Impoundment Control Act of 1974
(the Budget Act) which introduced discipline to the annual federal budget
process.3
Since that time, in conjunction with increasing budget deficits, a number of
legislative changes made it more difficult for Congress to enact revenue losing
measures. Members of Congress who wanted to offer a specific tax incentive
provision were generally required to find a revenue increasing offset to their
proposal.4
It is important to recognize that existing revenue estimating conventions can
distort the long term budget consequences to the federal government of cost
recovery proposals. Given the predetermined framework of the fixed budget
baseline, the 10-year budget window, and cash-flow accounting, revenue
estimates of many proposals – including accelerated cost recovery – tend to
distort the true nature of the provision.
The following section explains the fundamental concepts of revenue estimating.
Then, the analysis applies these concepts to JCT revenue estimates of
accelerated cost recovery to demonstrate the artificial nature of the estimating
process.
A. Key Concepts of Revenue Analyses
Revenue Baseline – The starting point for many revenue estimates is the
revenue baseline, which is the benchmark against which proposed changes in
the law are measured.5 This is a 10-year projection of federal revenues under
3
Public Law 93-344. Other factors have influenced the present-day scoring rules, including the Balanced Budget
and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings) which established maximum deficit
amounts and provided that, if the deficit exceeded the statutory limits, the president would be required to issue a
sequestration order under which discretionary spending would be reduced by a uniform percentage.
4
Thus, the specific size of a revenue losing provision became a much more important consideration in the
legislative process.
5
There are two revenue baselines – one prepared by the CBO and one prepared by the Office of Management
and Budget (OMB) in connection with the annual budget submitted to the Congress by the president. There are
two ways in which the revenue baselines of these two organizations may differ. First, the revenue baselines may
differ depending upon the macroeconomic forecasts used by each office. Second, the revenue baselines will
invariably differ because the OMB includes in its revenue baseline an assumption that the president’s budget
proposals are all enacted into law. The CBO baseline does not include such an assumption.
3
present law; thus, the revenue baseline generally is constructed assuming no
changes in current policies. The revenue baseline represents the best estimate of
the receipts and outlay activities by the federal government based on current
macroeconomic forecasts, such as interest rates, growth in the economy, and
changes in employment levels.
Budget Window – Revenue estimates are generally required to be provided as
point estimates, specifying a dollar amount, rather than a range of possibilities
for each year in the “budget window.” Revenue estimates rely on a fixed tenyear budget period. This means that only those changes that occur within this
window will contribute to the revenue estimate.6
While many revenue proposals are effective on a taxable year or calendar year
basis, the JCT prepares revenue estimates for each year within the budget
window as fiscal year estimates (for the period from October 1 to September 30,
which is the federal government’s fiscal year).7
Cash Method of Accounting – In general, the estimates of revenues and outlays
for purposes of the federal budget are measured on a cash basis – thus, the
budget measures the cash flows that occur with the collection of taxes and other
forms of federal income during each fiscal year during the budget scorekeeping
window and the disbursement of funds for various federal programs.8 The
theory is that using a single method of accounting for revenues and outlays will
allow the comparison of spending and revenue proposals on a comparable
basis.9
However, cash-flow revenue estimates of accelerated methods of depreciation
(as well as many other tax provisions) show significant revenue losses in early
years that are offset by revenue increases (associated with the reduced amounts
available for cost recovery) beyond the budget period.
The revenue baseline captures the current-law depreciation deductions claimed
over the 10-year budget period. The revenue analysis calculates the proposed
changes to depreciation deductions (e.g., in this case alternative depreciation
6
Historically, revenue estimates were prepared for a five-year period, but the period was extended to 10 years in
the late 1980s.
7
In addition, revenue estimates are required to be expressed in nominal dollars.
8
For example, such entitlement programs as Social Security, defense spending, transportation programs, etc., for
the same period.
9
Although Federal revenues and outlays generally are calculated on a cash basis, there are two notable exceptions
to this cash-basis accounting for outlay purposes. The Federal Credit Reform Act requires that the budget
recognize the present value of expected cash flows from new direct loans and loan guarantees at the time the loans
are disbursed, rather than over the life of the loans. In addition, interest on federal debt is included in the federal
budget as an outlay when the debt is incurred, rather than when the interest is paid. Refer to Comparing Budget
and Accounting Measures of the Federal Government’s Fiscal Condition, Congressional Budget Office,
December 2006.
4
system (ADS) method) for capital investment that is subject to the change. The
net difference between the baseline and the proposed change provides the
revenue estimates displayed on the JCT revenue tables.
Given the nature of accelerated cost recovery – simply a change in the timing of
deductions – the 10-year budget period fails to capture the offsets in revenue
losses that occur over the long term. In fact, the revenue pattern attributable to
cost recovery proposals simply capture the loss of the front-loaded deductions,
they do not increase the amount deducted. Examining the cost recovery patterns
beyond the ten-year window will more accurately reflect the long-term revenue
costs of these cost recovery proposals.
B. Revenue Estimates that Eliminate Accelerated Cost Recovery
For Federal tax purposes, taxpayers may claim an annual depreciation deduction
for the cost of tangible physical property used for the production of income.
Currently, the modified accelerated cost recovery system (MACRS) determines
the annual amount of depreciation that a taxpayer may claim.10 MACRS assigns
to specific asset classes a depreciation method, useful life (recovery period), and
a “placed in service” convention.
The taxpayer may apply either the 200-percent or 150-percent declining balance
method to determine the annual depreciation amount. MACRS recovery
periods range from three to 20 years for most tangible personal property.
Generally, tangible property must adopt a mid-year convention that assumes the
asset was placed in service midway through the tax year, thus allowing only half
of the first-year’s depreciation deduction (Refer to Appendix A, Table A-1)
In recent tax expenditure estimates and tax reform proposals, the JCT measured
changes to cost recovery allowances as the difference between current law and
cost recovery under the ADS (sec. 168(g)).11 ADS provides for straight-line
recovery over tax lives that are longer than those permitted under MACRS
(Refer to Appendix A, Table A-2).12
10
MACRS was part of the Tax Reform Act of 1986, Public Law No. 99-514, section 201(1986).
Many economists believe that ADS represents the ‘normal’ pattern of cost recovery. Therefore, for purposes of
tax expenditures and in such tax reform proposals as those proposed by Chairman Camp and Senator Widen, the
comparison is between current law and the ADS. However, modifications to current law cost recovery may
include a wide variety of options.
12
The proposed “Tax Reform Act of 2014” included provisions to allow an election for inflation adjustments of
the annual depreciation allowance.
11
5
Year:
MACRS
ADS
Difference
Table 1 – Comparison of the Annual Cost Recovery under
MACRS and ADS
1
2
3
4
5
6
7
107.10 255.10 182.20 130.20
93.00
88.50
88.60
71.30 142.90 142.90 142.90 142.90 142.90 142.90
35.80 112.20
39.30 -12.70 -49.90 -54.40 -54.30
8
55.30
71.30
-16.00
Total
$1,000
$1,000
0
When estimating the change in budget receipts of these two cost recovery
methods (MACRS and ADS), the analysis simply applies the methods to the
same asset and calculates the difference between the annual deductions. Table 1
provides an example of the nature of accelerated cost recovery. In this example,
the MACRS cost recovery relies on 200-percent declining balance method of
depreciation, and the half-year convention applies. The ADS relies on straightline method of depreciation and the half-year convention. In both cases, the
asset cost is $1,000 and the recovery period is 7 years.
Graph 1 Compare MACRS and ADS Depreciation Methods
140
$112.20
120
100
80
MACRS annual deduction exceeds ADS
60
40
$39.30
$35.80
20
0
year 1
-20
-40
year 2
year 3
year 4
-$12.70
year 5
year 6
year 7
year 8
-$16.00
ADS annual deduction exceeds MACRS
-$49.90
-60
-$54.40
-$54.30
-80
One important feature of this example is that the total amount available for cost
recovery remains unchanged. MACRS does not provide additional deductions;
it merely allows those deductions to be taken earlier than under ADS. This
example provides the basis for understanding the revenue pattern associated
with a proposal to eliminate accelerated cost recovery methods. It is clear from
6
this example, particularly over the 10-year budget window, that revenue
estimates of proposals to eliminate accelerated cost recovery simply move
deductions from one period to another.
C. Long-Term Revenue Effects
Table 2 provides two revenue estimates. The first estimate is the JCT revenue
estimate associated with the most recent proposal for eliminating accelerated
depreciation provisions – the “Tax Reform Act of 2014,” introduced by then
House Ways and Means Committee chairman Camp (“Camp proposal”). The
second estimate reflects the revenue analysis associated with a stand-alone
proposal to eliminate accelerated depreciation provisions.13
While both estimates rely on the standard JCT methodology, it is important to
note three differences between the two estimates. First, the provision in the
Camp proposal is part of a larger tax reform package that includes changes to
corporate income tax rates. Second, the Camp proposal includes a provision
which provides for an election to index the deduction for inflation. Third, the
Camp proposal delays the effective date, applying the proposal to property
placed in service after 2016.14
Since the JCT revenue analysis of the proposal contained in the Camp proposal
incorporates the effects of the reduced corporate tax rates, it does not reveal the
full effect of eliminating methods of accelerated cost recovery. This is because,
when estimating the revenue effects of a reform package, it is customary to start
the analysis with the tax rate reductions, then isolate the effects of eliminating
accelerated depreciation (evaluated at the new rates contained in the proposal).15
In addition, the provision takes effect for property placed in service after
December 31, 2016, so the quarterly tax payments (in the fiscal year) and
revenue increase would begin to show in 2016 and on the 2017 tax return which
the taxpayer files in 2018.16 This has the effect of maximizing the revenue
13
Both revenue analyses incorporate a behavioral response to proposals, consistent with JCT methodology.
These differences would result in lower revenue estimates than if the estimate were a stand-alone provision to
eliminate accelerated depreciation methods. In addition, the JCT does consider separately the macroeconomic
feedback effects, but does not include dynamic scoring methodologies in the revenue estimates. Dynamic scoring
methodologies would incorporate changes to the economic baseline that would result from effects of the
legislative changes. House Resolution 5, adopted January 6, 2015, requires the JCT and the CBO to use dynamic
scoring over a 10 year period and make qualitative comments on potential revenue effects over 30 years.
15
This effect is pronounced because, the pattern of the revenue loss associated with the corporate tax rate
decrease is one that grows steadily over time.
16
In addition to the timing effects associated with the annual differences in the two depreciation methods, the
revenue analysis includes another timing feature that distorts the revenue pattern – the choice of an effective date.
This estimate demonstrates the ability to ‘maximize the revenue pattern’ within the budget period by delaying the
effective date. The first revenue increase would not materialize until 2017, but the pattern which reverses the
revenue increasing trend (demonstrated in Graph 1) would fall outside the budget period.
14
7
increase by including the tax years with the largest revenue changes within the
budget window (overstating the long-run revenue effects).
The stand-alone proposal is similar to the provision contained in the Camp
proposal as it compares the revenue differences eliminating MACRS and
changing to ADS. However, it does not incorporate the reduced corporate tax
rates. Also, to capture the full effect of the revenue pattern, the effective date is
set at the beginning of the budget period, rather than several years later.
In both estimates, in any given year, the total revenue effect incorporates
changes in the depreciation deduction for assets purchased in the current as well
as prior tax years starting with the year the provision is effective. The asset
composition reflects all the various types of assets that comprise the total new
investment. Each year’s investment has a corresponding depreciation deduction
that reflects the associated cost recovery methods and recovery periods
applicable to each investment class.
Prospectively, the revenue in a given year represents the portion of the annual
depreciation deduction associated with each year’s investment – also referred to
as the ‘vintage.’ The sum of each vintage’s annual depreciation deduction
represents the total deduction. The revenue estimate calculates each vintage’s
depreciation using the MACRS method, then using the ADS method. For
example, for the Camp proposal, tax returns filed in 2020 (for the 2019 tax year)
would calculate the difference between the MACRS and ADS methods for all
depreciation claimed in that year. This depreciation would include vintages for
investment in the three previous tax years:



First-year depreciation for assets purchased in 2019;
Second-year depreciation for assets purchased in 2018; and
Third-year depreciation for assets purchased in 2017.
Table 2 – Estimated Revenue Effects of Provisions to Eliminate Accelerated Cost
Recovery Provisions, Fiscal Years 2014 – 202317
(Billions of Dollars)
Fiscal Year
Tax Reform Act of
2014*
Stand-Alone
Proposal †
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Total
-2.5
-9.0
-1.0
26.0
45.9
50.6
47.2
42.4
36.8
59.4
269.5
–
39.6
57.4
64.3
66.6
67.3
55.6
51.0
47.0
44.5
493.3
*The proposed change includes a provision which provides for an election to index the deduction for inflation. The
proposal applies to property placed in service after 12/31/16. The period following enactment of the legislation, but before
the effective date of the proposal allows a businesses to accelerate their investment activities.
†The proposal applies to property placed in service after 12/31/14.
Refer to the Joint Committee on Taxation, JCX-20-14, Estimated Revenue Effects of “the Tax Reform Act of
2014,” February 26, 2014.
17
8
Extending this analysis to the later years in the budget window indicates that the
revenue stream begins to erode and recoup deductions previously deferred.
Specifically, capital investment placed in service in the later years of the budget
window would dampen significantly the positive revenue generated from
replacing MACRS with ADS in future years.18
Graph 2 depicts the net revenue estimate of (1) a stand-alone proposal to
eliminate accelerated depreciation (2) the depreciation provision in the Camp
proposal. This estimate extends the budget period to the second ten-year budget
period. For purposes of this analysis, the stand-alone proposal would be
effective for property placed in service after December 31, 2014.
The graph demonstrates that the second ten-year period contains a significantly
dampened revenue gain for depreciation. The projected revenue from the standalone provision and the provision contained in the Camp proposal start to fall
off after only four years and continue to decline thereafter. Consequently, as a
long-term revenue source for tax reform, eliminating MACRS will not provide a
sustainable revenue increase. In other words, eliminating MACRS is not useful
for broadening the tax base, as it mainly shifts the deductions from one tax year
to another.
The blue line in the graph represents the revenue increase from the timing
change in depreciation deductions for each asset class calculated using MACRS
and ADS.19 The estimate provides the estimated long-term revenue effect of
eliminating MACRS in the absence of comprehensive tax reform.20 The red
line represents the estimated revenue increase from the timing change in
depreciation deductions for each asset class, assuming it were enacted as part of
a larger tax reform package (that included a reduction in the corporate tax rate).
It is important to reiterate that the total value of depreciation deductions that
taxpayers may take does not change. Only the year in which the taxpayer may
claim such deductions changes. In other words, limiting depreciation
deductions to the ADS rather than MACRS depreciation eliminates the frontloaded nature of those accelerated deductions. The ten-year estimated revenues
for such a change are much larger compared to the long-run effects of this
change.
18
This is true for all the capital investment that occurs in the final years of the budget period.
To reflect accurately the annual depreciation deduction, the investment for each asset class (and associated
class life) is estimated. In other words, as shown in Appendix B, based on historical trends, the new investment
assumes a similar composition to past investment. Each asset class receives depreciation treatment as provided
under current law (MACRS) and proposed law (ADS). The bars represent the difference between these two
calculations, beyond the current budget window.
20
It is important to note, if the net depreciation difference was evaluated in conjunction with a rate reduction,
then the net effect would be a revenue loss.
19
9
Graph 2 Estimated Revenue Effects during the
Second Ten-Year Budget Period, Repeal of MACRS for
Stand Alone and Tax Reform Provisions
80
(billions of dollars)
70
64.3
66.6 67.3
57.4
60
55.6
51.0
47.0
50
50.6
39.6
42.1
47.2
45.9
40
44.5
39.9
37.8
42.4
35.8
33.9
32.1
36.8
30
30.4
33.1
28.7 27.2
25.8
29.8
26.8
26.0
20
24.1
21.7
19.5 19.3 19.1 18.9 18.7 18.5
10
0
2015
2016
-1.0
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
-10
-9.0
-20
Repeal MACRS - Stand Alone
Repeal MACRS - Tax Reform
The revenue pattern associated with eliminating accelerated depreciation differs
from other revenue patterns, particularly those revenue estimates that move with
the level of economic activity (as opposed to those that shift revenue from one
budget period to another). Specifically, revenue losses associated with most tax
credits or rate changes move with the projected economic activity or growth of
the tax base.
This increasing pattern occurs because, over the budget period (first and second
ten-year periods) the aggregate economic activity (e.g., business receipts,
individual taxable income, numbers of tax filers – business and individual) is
projected by the Congressional Budget Office to increase steadily. Therefore,
applying a rate decrease or tax credits to this economic activity will generate
steadily increasing revenue loss throughout the budget period.
During the ten-year budget window, it is easy to give the appearance of
offsetting revenue effects. Yet, beyond the limited period – in the second ten
years – the revenue shortfall continues to grow and add to the budget deficit.
10
2033
Graph 3 Estimated Net Revenue Shortfall during the Second TenYear Budget Period
(millions of dollars)
0
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
-20
-40
-60
-67.0
-80
-79.4
-100
-71.1
-84.2
-75.1
-88.8
-79.1
-82.9
-93.1
-86.7
-97.3
-120
Repeal MACRS Stand Alone
-99.5
-90.4
-101.7
-94.1
-103.9
-97.7
-101.3
-106.2
-108.5
Repeal MACRS under Tax Reform
Graph 3 displays the estimated net revenue shortfall that results in the second
ten-year budget period from the repeal of MACRS (both the stand alone
provision and the provision contained in the Camp proposal) as a means of
paying for a tax decrease that moves with economic growth (including a
corporate rate cut). Future revenues collected by the Federal government would
fall short of expectations as the result of enactment of a tax reform measure that
relied on the repeal of MACRS. In other words, the ten-year budget window
fails to depict an accurate picture of using repeal of accelerated depreciation as a
revenue raiser – deferring the budget losses for a future Congress.
11
III.
Conclusions
Revenue increases associated with eliminating accelerated depreciation simply
shift depreciation deductions from earlier to later tax periods. Proposals to
modify the depreciation rules may accelerate or delay a deduction for tax
purposes, but they do not alter the total amount deducted.
Revenue estimates rely on a predetermined set of budget scoring rules and
estimating conventions which distort the long term budget consequences to the
Federal government of cost recovery proposals. Given the predetermined
framework of the fixed budget baseline, the 10-year budget window, and cashflow accounting, revenue estimates of many proposals – including accelerated
cost recovery – tend to distort the true nature of the provision.
Therefore, modifications to the depreciation rules may decrease deductions
during the budget window, and thereby increase revenues, but those deductions
will be available beyond the budget window. Eliminating accelerated
depreciation deductions is largely a front-loaded revenue increase.
Because of the nature of the depreciation allowance, a tax reform measure that
relies on cuts in accelerated depreciation as a long-term revenue offset would
have the effect of increasing future budget deficits. Those deficits would force
the government to consider budgetary changes in the future – including the
possible restoration of higher tax rates. Capital intensive businesses that invest
in domestic plant and equipment could thus face the permanent loss of
accelerated depreciation without the benefit of reduced tax rates. In addition,
accelerated depreciation plays an important role in stimulating investment and
economic growth. Loss of these provisions would alter those investment
decisions of many capital-intensive businesses.
12
Appendix A – Recovery Periods
Table A-1 – Recovery Period under MACRS and ADS
MACRS Recovery
Period
3 Years
5 Years
7 Years
10 Years
15 Years
20 Years
25 Years
27.5 Years
39 Years
50 Years
General Rule-ADS
Class Life21
4 years or less
More than 4 but less than
10 years
10 or more but less than
16 years and property
without a class life (other
than real property)
16 or more but less than
20 years
20 or more but less than
25 years
25 or more years
50 years
40 years
40 years
50 years
21
Type of
Property
3-year property
5-year property
7-year property
10-year property
15-year property
20-year property
Water utility property
Residential rental property
Nonresidential real property
Any railroad, grading or tunnel bore
General Rule-Class life refers to the class lives and recovery periods for ADS described in sections 168(c) and
(e).
13
Appendix B – Supporting Data
Table B-1 provides the estimated annual differences in depreciation deductions, by MACRS
class life for the projected investment ($1,250 billion) in 2023. The calculations assume that
the investment would continue at the projected levels, but the depreciation allowance for tax
purposes would change from MACRS to ADS. In most cases, this involves an increase in the
recovery period (extending the depreciation over a longer time period) and a decrease in
recovery methods (in most cases from 200 percent declining balance to straight line methods,
which reduces the allowable amount of depreciation in each year).
The investment relies on data from the Bureau of Economic Analysis investment flows for
2013. The projected values rely on the investment growth rates produced by the Congressional
Budget Office. The initial classification into MACRS class lives is consistent with data from
the Internal Revenue Service and the assigned values to Bureau of Economic Analysis data.
Tax
Year
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
3
10,315
20,630
-2,290
-8,025
-13,753
-6,877
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Table B-1 Estimated Annual Differences in
Depreciation Deductions
MACRS Class Life
5
7
10
15
56,608
22,665
1,272
1,766
135,860
59,498
3,611
6,540
58,873
34,246
2,482
5,170
12,680
16,234
1,579
3,955
7,359
3,348
856
2,853
-16,643
1,790
279
1,850
-56,608
1,824
-36
1,271
-56,608
-9,710
-36
1,271
-56,608
-28,866
-33
1,285
-56,608
-28,866
-36
1,271
-28,304
-28,866
-783
1,285
0
-28,866
-2,035
1,271
0
-14,433
-2,035
1,285
0
0
-2,035
1,271
0
0
-2,035
1,285
0
0
-1,017
-1,850
0
0
0
-7,063
0
0
0
-7,063
0
0
0
-7,063
0
0
0
-7,063
0
0
0
-3,531
0
0
0
0
0
0
0
0
14
20
760
3,077
2,565
2,093
1,655
1,250
876
529
430
430
430
430
431
430
431
430
431
430
431
430
-1,134
-3,742
-3,742
27.5
26
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
Tax
Year
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
2057
2058
2059
2060
2061
2062
2063
Total
3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Table B-1 Estimated Annual Differences in
Depreciation Deductions
MACRS Class Life
5
7
10
15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
15
20
-3,742
-3,742
-1,871
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
27.5
41
41
41
41
35
-90
-90
-90
-90
-90
-90
-90
-90
-90
-90
-90
-90
-45
0
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